Finally, the exponential moving average calculation goes by the following formula:

[close – EMA (previous day)] * multiplier + EMA (previous day).

Luckily, personal computers exist today. Because of that, trading platforms automatically calculate the EMA and project the value on any chart.

How to Use the EMA

Now that we explained the moving average calculator’s conditions for the EMA let’s explore the using of it.

In any Forex analysis, the strategy represents the starting point. Here are some of the most popular ways for using the exponential moving average in Forex trading.

Perfect Order Trading with Multiple EMA’s

The perfect order concept consists of using various moving averages. Or, to plot averages showing different periods.

In our case, the perfect order system uses EMA(20), (50), (100) and (200). Just like in the example below:

Again, the longer the period considered, the further from the price the EMA will be. The chart above shows the four EMA’s mentioned earlier. However, the perfect order system refers to the period when the EMA’s align correctly.

On a chart/timeframe, multiple perfect order situations may form. The EURAUD daily chart below shows the perfect example.

From left to right, the price breaks higher. How do we know that?

First, we look at the previous lower highs series. Second, we wait for the current price to break it. Finally, we wait for the EMA(20), or the blue line, to break above all the other EMA’s.

That’s all we need.

Moving forward, the perfect order forms in strong trends. But, the moment it appears on a chart is not always the ideal one to enter a trade.

Instead, traders wait for pullbacks. Remember what we said earlier?

The longer the period considered, the stronger the support or resistance area is. In the case of the EURAUD example, we consider them support. The new trend is bullish.

In other words, traders:

Wait for the perfect order to form.

Buy pullback into EMA(50) and (100)

Have a stop loss at EMA(200)

Target 1:2 or 1:2.5 risk-reward ratios.

That’s the strategy. And the earlier chart explains it.

Bollinger Bands Strategy with a Moving Average

Few traders know the famous Bollinger Bands indicator uses a moving average. However, most traders used at least once the Bands in their Forex analysis.

Remember what Bollinger Bands has in its componence? If not, here’s some help:

Upper Bollinger Band (UBB)

Middle Bollinger Band (MBB)

Lower Bollinger Band (LBB).

While all the focus and the fuzz stay with the UBB and LBB, the MBB deserves more attention. Why?

That’s the moving average used in the indicator. Some trading platforms don’t even display the MBB. Most of them show the SMA as MBB.

However, the most performant ones allow traders to choose the average to use. And, the exponential moving average is the perfect one for this purpose.

The AUDUSD chart above speaks for itself. The EMA shows as the line in the middle. Or, the green one.

Now, any other MA would fail to follow price so closely. That’s the reason why an exponential moving average works best in this kind of Forex analysis.

The strategy to use consists of:

Waiting for the bullish trend to start. Use the lower high series break again.

Buy the EMA pullbacks.

Stop loss on a close below LBB.

Target 1:2 or 1:2.5 risk-reward ratios.

As such, a simple approach to trading works best. But again, only when used with a sound money management system, the results will show up.

This way, there are plenty of occasions to ride the trend.

However, the beauty part comes from the timeframes to use. This is just one pair, and one timeframe.

Because of the money management rules, traders can use any timeframe. As long as they adjust the volume, they’ll be fine.

Golden and Death Crosses with EMA’s

For a golden or death cross to form, traders need two moving averages for their Forex analysis. Typically, SMA’s were used.

That’s understandable. Such crosses were invented on the stock market, long time ago.

Moreover, the exponential moving average concept wasn’t even available. It is now, though.

As explained earlier, the EMA comes closer to the price. It reduces the lagging time.

Therefore, when such a cross forms, the EMA’s will be the first ones to show the changes in trending conditions.

After all, this is what crosses like these show:

The birth of a bullish trend after a golden cross

The start of a bearish trend after a death cross

For this system, we need:

EMA(50)

And EMA(200).

The idea is to wait for the EMA(50) to cross above its bigger sister. That’s a golden cross. Or, a bullish one.

Just the opposite happens when it crosses below the EMA(200). A bearish market started.

The usual caveat applies here too: the bigger the time frame, the stronger the implications are.

The 2017 trend in the FX market formed on the EURUSD pair. Whoever missed it, lost a big chunk of the price action last year.

Now, the funny story is that a simple Forex analysis like a golden cross helps. It has multiple advantages over other strategies.

Firstly, it is visible. One cannot argue he/she missed the cross. Especially considering the timeframe.

Secondly, it allows for excellent risk-reward ratios. Just use the higher/lows or lower highs for placing stops. And, a proper risk-reward ratio for the currency market.

Finally, it allows traders to ride strong trends. Using simple trailing stops, traders stay in a trade for as long as the trend lasts.

SMA’s vs. EMA’s

Because the crosses were given by the exponential moving average strategy, it is clear the EMA’s role in a Forex analysis.

While this article emphasized the advantages of using an EMA, reality begs to differ. The SMA is not necessarily worse.

Instead, it depends a lot on the purpose of using it. Or, the ultimate goal.

Indeed, the EMA will “turn” before the SMA does. Thus, it offers an earlier signal.

However, the SMA represents the true average over a specified period of time. We can’t say the same about an EMA.

Therefore, the SMA’s plot a stronger support and resistance level than EMA’s.

Using this information, the best approach would be to:

Wait for golden/death crosses to form using EMA’s

Enter on support and resistance on SMA’s.

A simple trick like this one makes the difference in a Forex analysis.

Timeframes to Use the Exponential Moving Average

The real subtitle here should include the length of the EMA too. The 200 one seems to be the longest used.

Keep in mind that the longer the period is, the flatter the line becomes. As such, it will have a hard time turning with the new trend.

Many traders become alerted when the price of a currency pair hits the EMA(200). That’s especially true if the EMA is on a monthly, weekly, or daily chart. It shows difficulty to continue in the same direction.

The market reaction follows a specific logic here. Those that enjoyed the ride will book profits.

If the trend was a bullish one, by squaring the position, they’d sell. New traders that want to join the party will sell directly on the EMA(200).

As such, just like that, the two forces (both bulls and bears) join the same market side. Because of that, the price of a currency pair reacts strongly when the EMA(200) comes.

Conclusion

Any Forex analysis represents, in fact, a strategy. How traders approach the market matters the most.

Some use small timeframes to get what they want from the market. These so-called scalpers have a very short-term oriented approach.

They go in and out of the market so quick that an exponential moving average strategy won’t help much. Mostly, they trade on the news and with expert advisors.

Swing traders and investors, on the other hand, do use moving averages. Because they want to spot a trend reversal as early as possible, EMA’s represent the first choice.

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Damyan is a fresh MSc International Management from the International University of Monaco. During his bachelor and master programs, Damyan has been working in the area of financial markets as a Market Analyst and Forex Writer. He is the author of thousands of educational and analytical articles for traders. When being in bachelor school, he represented his university in the National Forex Trading Competition for students in Bulgaria and got the first place among 500 other traders. He was awarded a cup and a certificate at an official ceremony in his university.

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